Answer to Question #219889 in Macroeconomics for zain

Question

what is Keynes's explanation about the relationship between output and the price level in the long run?

Answer 1

According to Keynesian theory changes in demand have their greatest short run effect on output not on prices. Keynesian believe that what is true about the short run cannot necessarily be inferred to happen in the long run. Keynes's famous statement says "In the long run we are all dead"

But according to Keynes's theory, monetary policy can produce real effects on output only if prices are rigid. Keynesians believe that since prices are somehow rigid fluctuations in any component of spending- consumption, investment or government spending- cause output to fluctuate. If government spending increases, for instance, and all other components of spending remain constant then output will increase.

Keynesian models also includes what is called multiplier effect. It states that output increases by multiple of the original change in spending that caused it. Therefore an in increase in government spending could cause total output to rise.